Wednesday, March 7, 2012

More on the capital debates: Eatwell on Garegnani

Follow up on my previous post. Here is the link to the lecture given by John Eatwell in honor of Piero Garegnani (hat tip Revista Circus). It goes beyond the question of showing why and how mainstream (aggregative or intertemporal models) are flawed. It shows that the classical-Keynesian approach is rooted in a historical-institutional which makes it directly relevant for policy analysis. As he says:

"Economics is meant to be useful. Not only is it supposed to give a greater understanding of how a market economy works, but also it should be a guide to economic policy.

... classical value theory and Keynesian theory share a common structure that both are dependent upon empirical data from outside the theoretical core. Classical theory is dependent upon market structure, the composition of output and the distribution of income (or, to be more accurate, one of the distributive variables, the wage or the rate of profit). These data can be derived from the historical position of the economy, the stage of evolution in the history of technical progress, the structure of international trade, the structure of corporate enterprise, the financial and monetary system, the policies of the state, and so on, all of which are arrayed outside the core, but are vital to its specification. Similarly Keynesian theory is inconceivable without a clear specification of the structure of finance. The principle of effective demand is dependent upon the existence of a relatively sophisticated financial sector, and developments in the financial sector will in turn have an impact upon the determination of investment and the process of accumulation. It is one of the obvious failures of neoclassical theory that financial variables play no role in the determination of prices and outputs. It is an abiding strength of classical and Keynesian analysis that not only can financial variables be readily accommodated, some of the analysis will not work without them."